Global real estate adviser Cushman & Wakefield will issue a report later this month that casts European real estate - if somewhat cautiously - in a sunny light, despite the gloom and doom of recent months. ‘A total of EUR 62.8 bn of commercial property was traded in Europe in the third quarter of 2007, 23% ahead of the same period in 2006,’ according to the report. But despite strong activity and buoyant rental growth, a clear change has taken place, with investment yields rising for the first time since 2003. Cushman & Wakefield expects investment volumes to total EUR 235-240 bn for 2007 (against EUR 236 bn in 2006) as a result of strong investment activity so far this year. The outlook is for investment activity to slow into 2008.
Global real estate adviser Cushman & Wakefield will issue a report later this month that casts European real estate - if somewhat cautiously - in a sunny light, despite the gloom and doom of recent months. ‘A total of EUR 62.8 bn of commercial property was traded in Europe in the third quarter of 2007, 23% ahead of the same period in 2006,’ according to the report. But despite strong activity and buoyant rental growth, a clear change has taken place, with investment yields rising for the first time since 2003. Cushman & Wakefield expects investment volumes to total EUR 235-240 bn for 2007 (against EUR 236 bn in 2006) as a result of strong investment activity so far this year. The outlook is for investment activity to slow into 2008.
Investment volumes in the final quarter of 2007 are expected to trail last year's levels by some 30-35% after the flow of new deals ground to a halt in August and September. Michael Rhydderch, head of C&W's cross-border capital markets team, said that the credit crunch has clearly impacted trading volumes and pricing. 'But,' he commented, 'outside the UK, many parts of Europe have remained quite robust, with well-financed investors still active and enjoying a better choice of property than for some time. However, investors have become more demanding and Rhydderch confirmed that 'only the best product will sell at anything like the pricing levels seen earlier this year'.
Across Europe, yields rose in the third quarter for the first time since early 2003, with returns on offices rising an average of 13 basis points, driven by a 20bp move in Western markets. Central & Eastern Europe bucked this trend, with yields stable or down, as strong buying demand and limited prime supply continued to force pricing higher. Foreign investors remain dominant in many European markets, seeing their market share averaging 57% so far this year versus 44% in 2006.
'Good demand is evident from a range of buyers,' said Rhydderch, 'notably, long-term equity or low-geared buyers from the Middle East, Australia and North America are particularly evident. German buyers also have a stronger presence and more UK interest is anticipated.'
David Hutchings, head of European Research at Cushman & Wakefield, speculates that results for the last quarter will be a mixed bag. 'But it is really the results from Q1 and perhaps Q2 next year, which will be most telling. The way ahead for property will not be clear until we see how the economy is reacting but we are optimistic that current market conditions are actually bringing forward a correction in pricing and attitudes to risk which would have occurred anyway, rather than signalling the onset of a serious reversal. Nonetheless, the risk of a more adverse reaction, or over-reaction, will be with us for some time.'
